<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JULY 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6959
MITCHELL ENERGY & DEVELOPMENT CORP.
(Exact name of registrant as specified in charter)
TEXAS 74-1032912
(State of incorporation) (I.R.S. Employer Identification No.)
2001 TIMBERLOCH PLACE
THE WOODLANDS, TEXAS 77380
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 377-5500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Shares of common stock outstanding at August 31, 1995:
Class A . . . . . . . . 23,216,742
Class B . . . . . . . . 28,823,517
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Amendment of Previously Filed Form 10-Q . . . . . . . . . . . . . . . . . . . . . . . . 2
Representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Unaudited Consolidated Statements of Earnings . . . . . . . . . . . . . . . . . . . . . 5
Unaudited Consolidated Statement of Stockholders' Equity . . . . . . . . . . . . . . . . 6
Unaudited Condensed Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . 7
Notes to Unaudited Consolidated Financial Statements . . . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of
Financial Position and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 14
Part II - Other Information
Item 4. Submission of Matters to Vote of Security Holders . . . . . . . . . . . . . . . . 24
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
DEFINITIONS. As used herein, "MMBtu" means million British thermal units,
"Mcf" means thousand cubic feet, "MMcf" means million cubic feet, "Bcf" means
billion cubic feet, "Bbl" means barrel, "MMBbls" means million barrels, "NGL"
or "NGLs" means natural gas liquids, "fiscal 1995" and "fiscal 1996" refer,
respectively, to the 12-month periods ended January 31, 1995 and 1996 and
"DD&A" means depreciation, depletion and amortization. Pipeline throughput
volumes are based on average energy content of 1,000 Btu per cubic foot. Oil,
gas and NGL volume, price and reserve information amounts include applicable
equity partnership interests.
-1-
<PAGE> 3
Part I - Financial Information
ITEM 1. FINANCIAL STATEMENTS
AMENDMENT OF PREVIOUSLY FILED FORM 10-Q. This filing amends in its entirety
the report on Form 10-Q for the quarter ended July 31, 1995 of Mitchell Energy
& Development Corp. ("the Company").
Prior to July 1, 1995, the Company sold approximately 80,000 MMBtu per
day of its North Texas natural gas production to Natural Gas Pipeline Company
of America (Natural) under a long-term contract scheduled to expire on December
31, 1997. That contract, which was a 1989 restructuring of a 20-year
arrangement originally signed in 1977, required Natural to take and pay for an
annual average of 103,000 MMBtu per day (80,000 Company share) at per MMBtu
prices of $4.00 in 1995, $4.25 in 1996 and $4.50 in 1997. Natural had the
right to vary its takes up to a maximum of 113,000 MMBtu per day, and the
Company had to meet these requirements or forfeit the right to sell any
shortfall at the contract price.
Effective July 1, 1995, the Company agreed to the early termination of
this contract with Natural and recognized proceeds of $205,256,000, which
consisted of $176,189,000 to be received from Natural in connection with the
contract termination and $29,067,000 of previously deferred proceeds related to
the 1989 contract restructuring. After deducting capitalized property costs of
$109,484,000, the Company reported a gain of $95,772,000 on the contract buyout
in the second quarter of fiscal 1996. This transaction and the accounting
followed were discussed in detail in Note 7 to the financial statements and in
the Management's Discussion and Analysis of Financial Position and Results of
Operations section of the Company's second quarter Form 10-Q.
The Company's ability to realize the full value of the contract's terms
during the period it was in effect and to receive the remaining present value
of the contract's premium prices when the contract was terminated was the
direct result of expenditures it had incurred to meet the contract's gas
deliverability provisions. The needed delivery capacity would not have been
maintained had the Company not incurred greater costs to extend drilling
activities into different formations and to implement new technology. During
the last ten years, the Company drilled some 800 wells and spent in excess of
$500 million developing its North Texas gas reserves to meet the contract's
delivery specifications and thereby realize the maximum benefits available
under the agreement. Since the market-sensitive gas prices in the North Texas
area averaged only $1.60 per MMBtu during the ten-year period (versus the
contract's $3.48), much of the required development program was economically
justified only because of the premium prices available under the contract. As
a result, the contract's premium prices and the expenditures incurred to
develop North Texas reserves were closely interrelated.
At the contract's termination on July 1, 1995, unamortized costs of the
North Texas properties totaled $210,528,000. Upon termination of the contract,
the Company allocated these property costs between the contract termination
proceeds and the remaining proved reserves based on relative fair values. As
a result, it charged $109,484,000 of the North Texas property costs against
the contract termination proceeds. This approach was concurred with at the
time by the Company's independent public accountants.
-2-
<PAGE> 4
Subsequent to filing the second quarter Form 10-Q, the Company
had discussions with the Staff of the SEC relating to the appropriateness of
allocating property costs to the contract and expensing the allocated costs
upon contract termination. After these discussions, the Company has amended
its second quarter financial statements to reinstate the $109,484,000 of North
Texas property costs, thereby increasing the second quarter gain on the
contract termination by that amount. After taxes, this increased second quarter
net earnings by $67,721,000 (or $1.30 per share). The reinstated property costs
will be amortized prospectively as the North Texas reserves are produced
thereby lowering the earnings of future periods. The reinstatement of the
$109,484,000 of North Texas property costs affects the timing of the financial
statement expensing of these costs; it does not impact the Company's North
Texas reserve values or the timing or amounts of its cash flows from those
properties. The Company's independent public accountants concur with its new
method of accounting.
REPRESENTATION. The consolidated financial statements of Mitchell Energy &
Development Corp. and subsidiaries (the "Company") and related notes included
herein have been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations, although the Company believes
that the disclosures included herein are adequate to make the information
presented not misleading. In the opinion of the Company's management, all
adjustments--which include only normal and recurring adjustments--necessary for
a fair presentation of the financial position and results of operations for the
periods presented have been made. These financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's Annual Report for the year ended January 31, 1995 and with the
Management's Discussion and Analysis of Financial Position and Results of
Operations sections of that and this report.
Applicable prior-period financial statement amounts included herein have
been restated to give effect to the Company's previously reported adoption of
the successful efforts method of accounting for its oil and gas producing
activities.
-3-
<PAGE> 5
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands)
<TABLE>
<CAPTION>
JULY 31, January 31,
1995 1995
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 13,114 $ 11,967
Trade receivables, net of allowance for
doubtful accounts of $2,379 and $2,304 . . . . . . . . . . . . . . . . 112,521 133,995
Gas contract buyout proceeds due February 1, 1996 (present value) . . . . 92,089 -
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,423 13,068
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,320 24,808
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 240,467 183,838
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost less accumulated depreci-
ation, depletion and amortization of $1,394,758 and $1,381,977
Exploration and production
Oil and gas properties . . . . . . . . . . . . . . . . . . . . . . . . 490,806 487,981
Support equipment and facilities . . . . . . . . . . . . . . . . . . . 26,498 28,340
Gas services
Natural gas processing . . . . . . . . . . . . . . . . . . . . . . . . 98,830 100,139
Natural gas gathering . . . . . . . . . . . . . . . . . . . . . . . . 96,675 92,725
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,611 17,794
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,690 7,120
---------- ----------
743,110 734,099
---------- ----------
REAL ESTATE
The Woodlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 613,937 654,881
Land held for investment, development or sale . . . . . . . . . . . . . . 87,846 157,446
Resort and other operating properties . . . . . . . . . . . . . . . . . . 31,861 65,249
Notes and contracts receivable, at cost, net of
allowance for doubtful accounts of $621 and $515 . . . . . . . . . . . 35,981 40,314
---------- ----------
769,625 917,890
---------- ----------
OTHER ASSETS (including $82,809 present value of
gas contract buyout proceeds due February 1, 1997) . . . . . . . . . 114,008 20,044
---------- ----------
$1,867,210 $1,855,871
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,301 $ 11,617
Oil and gas proceeds payable . . . . . . . . . . . . . . . . . . . . . . 79,493 51,211
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . 114,040 107,414
---------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 205,834 170,242
---------- ----------
LONG-TERM DEBT
Energy operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 299,234 375,869
Real estate operations . . . . . . . . . . . . . . . . . . . . . . . . . 487,489 519,093
---------- ----------
786,723 894,962
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 214,971 200,722
Natural gas contract restructuring proceeds (Note 7) . . . . . . . . . . - 35,017
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,466 29,774
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,329 50,124
---------- ----------
346,766 315,637
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 5)
STOCKHOLDERS' EQUITY (Note 6)
Preferred stock, $.10 par value (authorized 10,000,000 shares; none
issued)
Common stock, $.10 par value
(authorized 100,000,000 Class A and 100,000,000 Class B shares) . . 5,386 5,386
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 143,343 143,472
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 404,428 347,573
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . (25,270) (21,401)
---------- ----------
527,887 475,030
---------- ----------
$1,867,210 $1,855,871
========== ==========
</TABLE>
- -------------------------------------
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 6
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands except per-share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31 July 31
----------------------- -----------------------
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Exploration and production (including gain on natural gas
contract buyout of $205,256 in the 1995 periods) (Note 7) . . $266,090 $ 69,653 $ 329,865 $144,062
Gas services (including gain on asset sale
of $29,828 in the 1994 periods) (Note 7) . . . . . . . . . . 112,065 132,490 231,576 249,465
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . 39,720 35,632 71,409 69,416
-------- -------- -------- --------
417,875 237,775 632,850 462,943
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES (including first quarter person-
nel reduction program costs of $14,535 in 1995) (Note 7)
Exploration and production . . . . . . . . . . . . . . . . . . 38,882 50,106 93,213 95,998
Gas services (including restructuring charges and
asset write-downs of $25,650 in the 1994 periods) . . . . . . 99,938 120,780 210,118 235,554
Real estate (including property write-downs
of $112,794 in the 1995 periods) . . . . . . . . . . . . . . 142,413 27,378 171,077 54,088
-------- -------- -------- --------
281,233 198,264 474,408 385,640
-------- -------- -------- --------
SEGMENT OPERATING EARNINGS (Note 7) . . . . . . . . . . . . . . 136,642 39,511 158,442 77,303
General and administrative expense (including first quarter
personnel reduction program costs of $5,665 in 1995). . . . . 9,246 10,660 25,799 20,915
-------- -------- -------- --------
TOTAL OPERATING EARNINGS . . . . . . . . . . . . . . . . . . . 127,396 28,851 132,643 56,388
-------- -------- -------- --------
OTHER EXPENSE
Interest expense . . . . . . . . . . . . . . . . . . . . . . . 16,229 17,051 32,670 35,335
Capitalized interest . . . . . . . . . . . . . . . . . . . . . (7,175) (7,330) (13,945) (15,013)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . 159 1,908 543 2,950
-------- -------- -------- --------
9,213 11,629 19,268 23,272
-------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . 118,183 17,222 113,375 33,116
INCOME TAXES (Note 4) . . . . . . . . . . . . . . . . . . . . . 44,936 5,821 43,309 11,297
-------- -------- -------- --------
NET EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . . $ 73,247 $ 11,401 $ 70,066 $ 21,819
======== ======== ======== ========
EARNINGS PER SHARE . . . . . . . . . . . . . . . . . . . . . . $ 1.41 $ .22 $ 1.35 $ .42
========= ========= ========= ========
AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . . . 52,031 52,755 52,043 52,754
====== ====== ====== ======
</TABLE>
_____________________________________
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE> 7
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Six Months Ended July 31, 1995
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained Treasury
DOLLAR AMOUNTS Stock Capital Earnings Stock Total
- -------------- --------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1995 . . . . . . . . . . . . . $5,386 $143,472 $347,573 $(21,401) $475,030
Net earnings . . . . . . . . . . . . . . . . . . . - - 70,066 - 70,066
Cash dividends (24 cents per share on Class A
and 26 1/2 cents per share on Class B) . . . . . - - (13,211) (13,211)
-
Treasury stock purchases . . . . . . . . . . . . . . - - - (4,130) (4,130)
Exercises of stock options . . . . . . . . . . . . . - (129) - 261 132
------- -------- -------- -------- --------
BALANCE, JULY 31, 1995 . . . . . . . . . . . . . . $ 5,386 $143,343 $404,428 $(25,270) $527,887
======= ======== ======== ======== ========
</TABLE>
==============================
<TABLE>
<CAPTION>
Common Stock Issued Treasury Stock
--------------------------- ----------------------
SHARE AMOUNTS Class A Class B Class A Class B
- ------------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1995 . . . . . . . . . . . 23,978,104 29,878,104 677,577 896,478
Treasury stock purchases . . . . . . . . . . . . - - 94,100 167,500
Exercises of stock options . . . . . . . . . . . - - (10,321) (9,397)
Other . . . . . . . . . . . . . . . . . . . . . (6) (6) - -
---------- ---------- ------- ---------
BALANCE, JULY 31, 1995 . . . . . . . . . . . . . 23,978,098 29,878,098 761,356 1,054,581
========== ========== ======= =========
</TABLE>
_____________________________________
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE> 8
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
July 31
------------------------
1995 1994
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings .................................................................. $ 70,066 $ 21,819
Adjustments to reconcile net earnings
to cash provided by operating activities
Depreciation, depletion and amortization ................................. 55,878 79,099
Exploration expenses, including dry-hole costs ........................... 7,740 6,056
Deferred income taxes .................................................... 14,249 6,250
Cost of land sold ........................................................ 17,538 17,838
Residential land development costs, net of reimbursements ................ (8,855) (6,869)
Distributions in excess of earnings of equity investees .................. 4,269 3,193
Amortization of deferred natural gas contract restructuring proceeds ..... (5,950) (8,254)
Non-cash portion of natural gas contract buyout gain ..................... (162,689) -
Write-downs of real estate properties .................................... 112,794 -
Accrued personnel reduction program costs ................................ 11,128 -
Gains from energy asset sales ............................................ (4,338) (33,619)
Accrued restructuring costs .............................................. - 10,340
Other .................................................................... 2,547 4,603
--------- ---------
114,377 100,456
Changes in operating assets and liabilities .............................. 58,128 (39,321)
--------- ---------
Cash provided by operating activities .................................... 172,505 61,135
--------- ---------
INVESTING ACTIVITIES
Capital and exploratory expenditures
Total on accrual basis ..................................................... (98,868) (108,509)
Residential land development costs deducted above .......................... 8,855 6,869
Adjustment to cash basis ................................................... (7,205) (10,129)
--------- ---------
(97,218) (111,769)
Proceeds from major energy asset sales (collection of
final portion of Winnie/Spindletop proceeds in 1995) ....................... 12,000 117,000
Proceeds from sales of real estate commercial properties ...................... 25,644 -
Other ......................................................................... 1,195 2,191
--------- ---------
Cash provided by (used for) investing activities ......................... (58,379) 7,422
--------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of debt ................................................ - 150,779
Debt repayments ............................................................... (94,759) (200,473)
Cash dividends ................................................................ (13,211) (13,390)
Treasury stock purchases ...................................................... (4,130) -
Debt prepayment premium ....................................................... - (6,420)
Other ......................................................................... (879) (592)
--------- ---------
Cash used for financing activities ....................................... (112,979) (70,096)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .............................. 1,147 (1,539)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................ 11,967 21,832
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...................................... $ 13,114 $ 20,293
========= =========
</TABLE>
_____________________________________
The accompanying notes are an integral part of these financial statements.
-7-
<PAGE> 9
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1995
(1) ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Mitchell
Energy & Development Corp. and its majority-owned subsidiaries (the "Company").
All significant intercompany accounts and transactions are eliminated in
consolidation. The Company follows the equity method of accounting for
investments in 20%- to 50%-owned entities.
The successful efforts method of accounting is used for the Company's
oil and gas producing activities.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121 which is intended to establish more consistent accounting standards for
measuring the recoverability of long-lived assets. The Company must adopt this
statement no later than for its quarter ending April 30, 1996. Since the
Company has not completed its analysis of the potential impact of this
statement on all of its assets, it is unable at this time to estimate the
impact, if any, that the adoption of this statement will have on its financial
statements. However, based on the analysis that has been completed, the
Company believes that no significant adjustments to the carrying values of its
oil and gas and real estate properties will be necessary when it implements
this statement.
In January 1996, the Company amended its financial statements for the
second quarter of fiscal 1996 to reinstate $109,484,000 of North Texas property
costs that had been charged against proceeds received in connection with the
early termination (effective July 1, 1995) of a natural gas sales contract. As
a result, the second quarter gain on this transaction was increased by
$109,484,000. After taxes, net earnings for the three- and six-month periods
ended July 31, 1995 were increased by $67,721,000 ($1.30 per share). See pages
2 and 3 of the Company's Form 10-Q/A - Amendment No. 1 For The Quarter Ended
July 31, 1995 for additional information concerning this matter.
Certain reclassifications of amounts previously reported have been made
to conform to the current year's presentation.
(2) REAL ESTATE OPERATIONS
In accordance with industry accounting practice, real estate assets are
reported as long-term assets in the consolidated balance sheets. Because they
represent the principal revenues and costs for these activities, interest
income and interest expense of the Company's finance operations are reported,
respectively, as revenues and as costs and expenses in the consolidated
statements of earnings.
-8-
<PAGE> 10
(3) EQUITY INVESTMENTS
Entities accounted for on the equity method include approximately 30
partnerships engaged in energy or real estate activities. The principal
partnership interests included the following at July 31, 1995:
<TABLE>
<CAPTION>
Ownership
Percentage Nature of Operations
---------- ----------------------------------
<S> <C> <C>
ENERGY
Austin Chalk Natural Gas Marketing Services 45 Natural gas marketing
Belvieu Environmental Fuels 33.33 Production of MTBE
C&L Processors Partnership 50 Natural gas processing
Ferguson-Burleson County Gas Gathering System 45 Natural gas gathering
Gulf Coast Fractionators 38.75 Fractionation of NGLs
U. P. Bryan 45 Natural gas processing
REAL ESTATE
The Fort Crockett Hotel Limited 50 Resort hotel in Galveston, Texas
Lake Catamount Joint Venture 50 Land held for development
The Woodlands Mall Associates 50 Regional mall in The Woodlands
Woodlands Office Equities - '95 Limited 25 Office buildings in The Woodlands
</TABLE>
Other real estate partnerships own a cable television system serving The
Woodlands and various commercial properties, most of which are located in The
Woodlands.
The Company's net investment in each of these entities is included in
the applicable segment's asset caption of the consolidated balance sheets, and
its equity in the pretax earnings or losses of each entity is included in the
applicable revenues or operating costs and expenses caption of the consolidated
statements of earnings.
The following paragraphs present summarized financial statement
information, which is generally reported on a one-month lag, for all entities
accounted for on the equity method. Summarized earnings information for these
entities for the three- and six-month periods ended July 31, 1995 and 1994
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
-------------------- --------------------
1995 1994 1995 1994
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . $154,475 $118,083 $258,274 $219,713
Operating earnings . . . . . . . . . . . . . . . . . 18,910 10,290 34,600 14,411
Pretax earnings (before interest expense for
those entities whose activities are funded
by capital contributions of the owners)* . . . . . 10,228 5,659 19,504 6,215
Proportionate share of pretax earnings included
in the Company's reported operating earnings* . . 4,677 3,364 8,991 2,998
</TABLE>
____________________________________
*Amounts for the 1995 periods are net of $8,276,000 ($4,138,000 proportionate
share) of property write-downs discussed in the following paragraph.
-9-
<PAGE> 11
The Company has concluded that it would be in the best interest of the
limited partners of The Fort Crockett Hotel Limited and itself, that the
partnership's property, The San Luis Hotel, be sold and the partnership
liquidated. As a result, the partnership recorded an impairment loss of
$8,276,000 during June 1995 to reduce the carrying amount for this asset to its
estimated market value. The Company's share of this loss is included in the
real estate property write-downs it recorded during the three-month period
ended July 31, 1995 (see Note 7).
The operations of certain of these partnerships have been funded using
term loans secured by their assets and in some cases by contractual commitments
or guaranties of the partners. Information concerning debt payable to third
parties by these entities at July 31, 1995 and January 31, 1995 and the
Company's proportionate share of such debt at July 31, 1995 is summarized below
(in thousands):
<TABLE>
<CAPTION>
Entity Total July 31, 1995 -- Company's Share
------------------------- ----------------------------------
July 31, January 31, Non-
1995 1995 Recourse Recourse Total
-------- ----------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
ENERGY ACTIVITIES
Belvieu Environmental Fuels . . . . . $176,000 $176,000 $ 58,667 $ - $ 58,667
C&L Processors Partnership . . . . . 93,709 101,209 25,302 21,553 46,855
Gulf Coast Fractionators . . . . . 78,900 79,550 16,572 14,002 30,574
-------- -------- -------- -------- --------
348,609 356,759 100,541 35,555 136,096
-------- -------- -------- -------- --------
REAL ESTATE ACTIVITIES
The Fort Crockett Hotel Limited . . . 11,268 11,592 4,000 1,634 5,634
The Woodlands Mall Associates . . . . 58,481 54,683 29,241 - 29,241
Apartment partnerships . . . . . . . 33,589 41,019 593 10,430 11,023
Others . . . . . . . . . . . . . . . 55,221 42,609 2,270 21,126 23,396
-------- -------- -------- -------- --------
158,559 149,903 36,104 33,190 69,294
-------- -------- -------- -------- --------
$507,168 $506,662 $136,645 $ 68,745 $205,390
======== ======== ======== ======== ========
</TABLE>
See Note 4 of Notes to Consolidated Financial Statements on pages 56 and 57 of
the Company's Fiscal 1995 Annual Report for additional information concerning
the indebtedness of these partnerships.
In August 1995, the indebtedness of Belvieu Environmental Fuels was
converted to a five-year term loan maturing May 31, 2000. The term loan is
severally guaranteed on a prorata basis by the partners. Once the plant passes
a production test and is certified by the lending banks' engineer, these
guaranties will be eliminated, and the loan will become nonrecourse.
(4) INCOME TAXES
Income taxes for the six-month periods ended July 31, 1995 and 1994
consist of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
CURRENT
Federal . . . . . . . . . . . . . . . . . . . . . . $26,700 $ 3,273
State . . . . . . . . . . . . . . . . . . . . . . 2,360 1,774
------- -------
29,060 5,047
------- -------
DEFERRED
Federal . . . . . . . . . . . . . . . . . . . . . . 8,512 5,511
State . . . . . . . . . . . . . . . . . . . . . . 5,737 739
------- -------
14,249 6,250
------- -------
$43,309 $11,297
======= =======
</TABLE>
-10-
<PAGE> 12
The Company's estimated annual tax rates for the six-month periods ended
July 31, 1995 and 1994 were 38.2% and 34.1%, respectively, versus the 35%
statutory Federal income tax rate. A larger-than-normal provision for state
income taxes resulting from the gas contract buyout was the principal cause of
the 1995 period's higher rate.
(5) COMMITMENTS AND CONTINGENCIES
LITIGATION AND OTHER. The Company is party to various claims and other
legal actions arising in the ordinary course of its business and to recurring
examinations performed by the Internal Revenue Service and other regulatory
agencies. While the outcome of such matters cannot be predicted with
certainty, management expects that adjustments, if any, resulting from the
ultimate resolution of these matters will not be material to the Company's
financial statements.
MORTGAGE ACTIVITIES. Mitchell Mortgage Company (MMC) administers
approximately $173,000,000 of securities backed by Federal Housing
Administration (FHA) and Department of Veterans Affairs (VA) mortgages, on
which it has guaranteed payments of principal and interest to the security
holders. These mortgages are supported by government-sponsored insurance and
are collateralized by real estate. In the event of default by a mortgagor, MMC
may incur a loss if uncollected principal and interest, together with
foreclosure and other costs, exceed established FHA or VA reimbursement limits.
Management expects that losses, if any, incurred in connection with defaults by
borrowers under FHA and VA mortgages serviced by MMC will not be material to
the Company's financial statements.
(6) STOCK OPTIONS
In June 1995, the Board of Directors adopted the 1995 Stock Option Plan,
which provides for the issuance of options to purchase up to 2,500,000 shares
of Class B Common Stock (including a maximum of 500,000 in calendar 1995) at
prices not less than the market value of the stock on the date of grant. The
plan is administered by a committee of the Board of Directors which has the
authority to determine the employees to whom awards will be made, the amounts
of the awards and other terms and conditions of the awards. On June 28, 1995,
options were granted at $17.625 per share covering 478,300 shares (subject to
obtaining stockholder approval of the plan within one year). Such grants
become exercisable in three equal annual installments beginning one year after
grant and expire 10 years after grant. In connection with the adoption of this
plan, the directors cancelled the right to make additional grants under the
Company's 1989 Stock Option Plan.
-11-
<PAGE> 13
(7) SEGMENT INFORMATION
Selected industry segment data for the six- and three-month periods
ended July 31, 1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
Segment
Outside Operating Capital
Revenues Earnings DD&A Expenditures*
--------------------- ------------------- ------------------- -------------------
1995 1994 1995 1994 1995 1994 1995 1994
-------- -------- ------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Six Months
- ----------
EXPLORATION AND PRODUCTION
Operations ......................... $120,271 $139,592 $ 34,993 $44,273 $42,763 $48,831 $55,736 $61,627
Gain from gas contract buyout ...... 205,256 - 205,256 - - - - -
Personnel reduction program costs .. - - (7,935) - - - - -
Gain from producing property sale .. 4,338 - 4,338 - - - - -
Gain from sale of drilling rigs .... - 4,470 - 3,791 - 679 - -
-------- -------- -------- ------- ------- ------- ------- --------
329,865 144,062 236,652 48,064 42,763 49,510 55,736 61,627
-------- -------- -------- ------- ------- ------- ------- --------
GAS SERVICES
Natural gas processing ............. 148,442 98,044 16,299 5,847 3,405 4,548 2,790 2,269
Natural gas gathering
and marketing .................... 78,655 116,968 4,794 3,597 3,579 4,693 12,749 8,342
Other .............................. 4,479 4,625 3,965 289 53 1,313 3,645 1,894
Personnel reduction program costs .. - - (3,600) - - - - -
Gain from major asset sale ......... - 29,828 - 29,828 - - - -
Restructuring charges
and asset write-downs ............ - - - (25,650) - 13,183 - -
-------- -------- -------- ------- ------- ------- ------- --------
231,576 249,465 21,458 13,911 7,037 23,737 19,184 12,505
-------- -------- -------- ------- ------- ------- ------- --------
REAL ESTATE
Operations ......................... 71,409 69,416 16,126 15,328 4,355 4,106 22,784 32,789
Write-downs of properties .......... - - (112,794) - - - -
Personnel reduction program costs .. - - (3,000) - - - - -
-------- -------- -------- ------- ------- ------- ------- --------
71,409 69,416 (99,668) 15,328 4,355 4,106 22,784 32,789
-------- -------- -------- ------- ------- ------- ------- --------
CORPORATE .......................... - - - - 1,723 1,746 1,164 1,588
-------- -------- -------- ------- ------- ------- ------- --------
$632,850 $462,943 $158,442 $77,303 $55,878 $79,099 $98,868 $108,509
======== ======== ======== ======= ======= ======= ======= ========
Three Months
- ------------
EXPLORATION AND PRODUCTION
Operations ......................... $ 56,496 $ 69,653 $ 17,614 $ 19,547 $ 19,285 $ 26,269 $24,510 $ 27,044
Gain from gas contract buyout ...... 205,256 - 205,256 - - - - -
Gain from producing property sale .. 4,338 - 4,338 - - - - -
-------- -------- -------- ------- ------- ------- ------- --------
266,090 69,653 227,208 19,547 19,285 26,269 24,510 27,044
-------- -------- -------- ------- ------- ------- ------- --------
GAS SERVICES
Natural gas processing ............. 67,204 48,735 6,657 3,530 1,700 2,261 396 1,928
Natural gas gathering
and marketing .................... 41,215 51,357 2,071 3,316 1,776 2,057 6,268 3,904
Other .............................. 3,646 2,570 3,399 686 26 649 3,553 555
Gain from major asset sale ......... - 29,828 - 29,828 - - - -
Restructuring charges
and asset write-downs ............ - - - (25,650) - 13,183 - -
-------- -------- -------- ------- ------- ------- ------- --------
112,065 132,490 12,127 11,710 3,502 18,150 10,217 6,387
-------- -------- -------- ------- ------- ------- ------- --------
REAL ESTATE
Operations ......................... 39,720 35,632 10,101 8,254 1,985 2,088 13,548 17,311
Write-downs of properties .......... - - (112,794) - - - - -
-------- -------- -------- ------- ------- ------- ------- --------
39,720 35,632 (102,693) 8,254 1,985 2,088 13,548 17,311
-------- -------- -------- ------- ------- ------- ------- --------
CORPORATE ......................... - - - - 839 897 153 800
-------- -------- -------- ------- ------- ------- ------- --------
$417,875 $237,775 $136,642 $39,511 $25,611 $47,404 $48,428 $ 51,542
======== ======== ======== ======= ======= ======= ======= ========
- ----------------------------------
</TABLE>
*On accrual basis, including exploratory expenditures.
Effective July 1, 1995, the Company terminated its North Texas gas sales
contract with Natural Gas Pipeline Company of America (Natural) which had been
scheduled to expire on December 31, 1997. In exchange, it received proceeds
(for itself and other interest owners) consisting of $55,500,000 in cash (which
was used to pay down long-term debt), receivables with present values of
$91,608,000 and $82,369,000, respectively, related to payments of $95,000,000
and $91,000,000 due from Natural on February 1, 1996 and 1997 and ownership
(effective in January 1998) of Natural's gathering system that
-12-
<PAGE> 14
serves the Company's 1,500 North Texas wells. The discounted value of the
Company's share of these early termination proceeds aggregated $176,189,000.
After recognizing the remaining $29,067,000 of previously deferred
restructuring proceeds related to this contract, the Company reported a gain of
$205,256,000 on the contract buyout in the second quarter of fiscal 1996. As a
result of the contract termination, beginning July 1, 1995, the Company now
receives market-sensitive prices for 80 MMcf per day of natural gas for which
it had received $4 per Mcf.
During the three-month period ended April 30, 1995, the Company
implemented a personnel reduction program which resulted in the elimination of
approximately 300 jobs. Aggregate pretax costs of this program, including
$5,665,000 reported as general and administrative expense, totaled $20,200,000.
Of these costs, $11,128,000 represented the present value of incremental
pension and retiree medical benefits provided under a voluntary incentive
retirement program offered to 130 employees (114 of whom accepted) while
$9,072,000 represented the cash costs of severance and other benefits.
Exploration and Production segment operating earnings for the
three-month period ended July 31, 1995 include a gain of $4,338,000 from the
sale of certain West Texas producing oil and gas properties. During the
three-month period ended April 30, 1994, the Company sold 16 land drilling rigs
for $9,000,000 in cash and warrants to acquire common stock of the purchaser
under which as much as an additional $1,000,000 may be realized during the
two-year period following the sale. This sale effectively completed the
Company's withdrawal from the contract drilling business. The $3,791,000 gain
from this sale, which did not include any value for the warrants, is reported
as a component of the segment operating earnings of the Exploration and
Production Division.
During the three-month period ended July 31, 1994, the Company sold its
Spindletop gas storage facility, its Winnie Pipeline system and a 50% interest
in a related gas processing plant for $120,000,000 and recorded a gain of
$29,828,000. On June 1, 1994, the Company received cash proceeds of
$108,000,000, which were used to pay down outstanding borrowings under its
revolving credit and commercial paper facilities. The remaining sales proceeds
of approximately $12,000,000, together with interest from June 1, 1994, were
received in February 1995.
Also during the three-month period ended July 31, 1994, Gas Services
Division restructuring charges and asset write-downs totaling $25,650,000 were
recorded. This restructuring program was undertaken because of the adverse
economic environment, particularly prices and margins, experienced by these
businesses during the last half of fiscal 1994 and early in fiscal 1995. The
restructuring program called for the sale or disposition of a number of idle
gas processing plants, including leased equipment associated with certain of
them. In this regard, asset write-downs and other non-cash charges totaling
$18,286,000 were recorded. In addition, a voluntary incentive retirement
program was undertaken to bring the division's employment level in line with
the expected future needs. The costs associated with this program aggregated
$7,364,000, most of which will be paid out over an extended period as
incremental retirement and retiree medical benefits.
In August 1995, the Company completed a real estate asset management
study and adopted a revised business plan that calls for the disposal of most
of its properties located outside The Woodlands. Because of the revised
business plan, it was necessary to reduce the carrying values of certain
properties (principally land held for investment, development or sale and
resort and other operating properties) to their estimated fair market values.
As a result, write-downs of $112,794,000 were recorded during the three-month
period ended July 31, 1995.
(8) SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid--exclusive of amounts capitalized, but including amounts
reported as cost of sales for finance operations--totaled $19,664,000 and
$18,804,000 during the six-month periods ended July 31, 1995 and 1994. Income
taxes paid during these periods totaled $2,906,000 and $336,000. A newly
formed, 25%-owned partnership assumed a mortgage obligation of $12,796,000 in
connection with its July 1995 purchase of ten office buildings from the
Company. There were no other significant non-cash investing or financing
activities during the six-month periods ended July 31, 1995 and 1994.
-13-
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
POSITION AND RESULTS OF OPERATIONS
(The information included in this section has been revised in its entirety to
give effect to the amendment of the Company's financial statements discussed on
pages 2 and 3 hereof.)
LIQUIDITY AND CAPITAL RESOURCES
The discussion which follows summarizes the Company's financial position
at July 31, 1995 and the results of its operations for the six-month period
then ended, and should be read in conjunction with the summarized financial
statements and notes thereto included elsewhere in this Form 10-Q and the
financial statements, notes thereto and other financial data included in the
Company's Annual Report for the fiscal year ended January 31, 1995. Applicable
amounts shown herein for the six-month period ended July 31, 1994 have been
restated to give effect to the Company's previously reported adoption of the
successful efforts method of accounting for its oil and gas producing
activities.
REFOCUSING OF THE COMPANY'S OPERATIONS. Beginning in fiscal 1995, management
embarked on an extensive refocusing of the Company to (i) improve stockholder
value, (ii) position the Company to better compete in volatile, and sometimes
depressed, energy markets and (iii) mitigate, either through new sources or
cost reductions, the loss of cash flows that would occur with the scheduled
expiration on December 31, 1997 of the premium-priced North Texas sales
contract covering approximately one-half of its natural gas production.
Because of the broad range of issues involved, it was understood that no
single, easily implemented measure would suffice. Rather, a number of actions
would need to be implemented over time.
Actions being implemented as a result of this effort include streamlining
operations by concentrating activities on core businesses with an appropriate
mix of near- and long-term profit potential and eliminating other activities
and the costs associated with them. Consistent with this, capital spending is
being directed almost exclusively to the drilling and recompletion of wells and
acquisitions of oil and gas properties in core areas, expanding gas processing
plants serving core areas, expansion of an Austin Chalk gas gathering system
and continued development of The Woodlands. In addition, oil and gas finding
costs are being minimized by concentrating the exploration program on core
areas where the Company has had the greatest success.
As part of the program, a companywide asset study was undertaken to
identify for sale underutilized assets or non-core holdings that have greater
value to others. Three major energy assets were sold during fiscal 1995 at a
pretax gain of $52.6 million for a total consideration of $164 million. The
Company has identified certain other energy assets that it plans to dispose of,
including marginally profitable oil and gas properties (some of which were sold
in fiscal 1996) and certain underutilized gas processing plants and gas
gathering systems. Asset write-downs and restructuring charges were recorded
in fiscal 1995 to, among other things, reduce the carrying values of the assets
to be disposed of to their estimated sales values.
During August 1995, the Company completed the real estate property
portion of its asset study, concluding that it should place even greater
emphasis on developing The Woodlands and work toward disposing of most of its
other holdings through sales or accelerated development. Based on an extensive
review of the estimated values to be realized from these dispositions, the
Company recorded pretax asset write-downs totaling $112.8 million in fiscal
1996's second quarter. The Company believes that both its profitability and
financial flexibility will be enhanced by monetizing these assets and
redeploying the proceeds instead of holding the properties for long-term
investment or development. In addition, sales of these properties will enable
the Company to concentrate its efforts, reduce real estate debt and begin
recapitalizing its remaining holdings to enhance their returns, either as part
of the corporation or as a stand-alone entity.
Following these write-downs, the remaining book value of the Company's
properties outside The Woodlands totaled $119.7 million. Consistent with the
asset study conclusions, an earnest money contract was signed during August
1995 to sell more than 22,000 acres of timberlands northwest of The Woodlands,
and The San Luis Resort in Galveston was listed for sale in August 1995. The
timberlands
-14-
<PAGE> 16
sale is scheduled to close in the fourth quarter upon completion of customary
survey and title work. No significant gain or loss is expected on the
timberlands sale since its terms were considered in determining estimated
values in connection with the asset study.
As a result of the fiscal 1995 asset sales, attrition and a voluntary
incentive retirement program covering the Gas Services Division, the Company's
full-time employment level was reduced by approximately 300 (from 2,900 to
2,600) in fiscal 1995. To further lower costs, a companywide cost reduction
program was undertaken in fiscal 1996's first quarter that resulted in the
elimination of approximately 300 additional jobs. Voluntary incentive
retirement benefits were provided to 114 participants and severance benefits
were paid to terminated employees not eligible for the retirement benefits.
The $20.2 million pretax cost of this program, which the Company expects to
recover in approximately one year, was accrued during the first quarter of
fiscal 1996.
To facilitate its transition to the market-sensitive environment, the
Company entered into agreements with Natural Gas Pipeline Company of America
(Natural) terminating effective July 1, 1995 the Company's North Texas gas
sales contract that otherwise would have expired on December 31, 1997 (such
agreements are filed as Exhibits 10(a) and 10(b) to this Form 10-Q). Effective
with the contract buyout, the Company gained operational control of Natural's
gathering system that services the Company's North Texas wells and will obtain
ownership of that system on January 1, 1998. In addition, for itself and other
interest owners, the Company received a $55.5 million cash payment on July 1,
1995 and receivables with present values of $91.6 million and $82.4 million
related to payments due from Natural on February 1, 1996 and 1997 of $95
million and $91 million. The timing of these payments accelerates the Company's
receipt of the premium financial benefits of the contract, making these funds
available earlier for debt repayment or funding acquisitions or other
investments to replace a portion of the operating cash flows previously
provided by the North Texas contract. Further, the buyout freed the Company
from contract-related production limits, and the gain resulting from the buyout
accelerated its use of approximately $25 million in Federal income tax credit
carryforwards.
The present value of the Company's share of the early termination
proceeds totaled approximately $176.2 million. After recognizing $29.1 million
of previously deferred restructuring revenues related to the Natural contract,
the Company reported a pretax gain of $205.3 million on the contract buyout in
fiscal 1996's second quarter.
As a result of the contract termination, the Company now receives
market-sensitive prices for the approximately 80 MMcf per day of residue gas
that Natural had been buying for $4 per Mcf (the "wet" production volumes
associated with these sales approximate 103 MMcf per day). Because of this,
beginning in July 1995, the Company's ongoing natural gas revenues have been
substantially reduced. From a cash flow standpoint, however, this will be
mitigated by the cash receipts from Natural on February 1, 1996 and 1997 and
proceeds from asset sales as well as reduced outlays resulting from past and
future actions associated with the Company's refocusing efforts.
The Company incurred significant development costs in North Texas during
the period the contract was in place to insure that it would meet the
contract's delivery specifications and thereby realize the full value of its
premium prices. Since market-sensitive gas prices in the North Texas area
averaged only $1.60 per MMBtu during the last ten years (versus the contract's
average of $3.48), much of the required development program was economically
justified only because of the premium prices available under the contract. As
discussed above, the contract's termination substantially reduces the Company's
future North Texas gas revenues since this production will be sold at
market-sensitive prices instead of the contract prices. Since, after the
amendment of the second quarter financial statements, none of the $210,528,000
of unamortized costs of the North Texas properties was charged against the
proceeds the Company received for agreeing to terminate the contract, there
will not be a proportionate reduction in North Texas DD&A expense. Because of
this, DD&A expense will constitute a higher percentage of the Company's oil and
gas revenues for periods subsequent to the contract's termination than was the
case earlier.
FUNDING OF THE COMPANY'S OPERATIONS. The Company generally has funded its
investing activities using cash provided from operating activities and sales of
varying interests in mature real estate assets, supplemented to the extent
necessary with proceeds from long-term borrowings. The primary sources of
borrowed funds in recent years have been bank credit agreements of the energy
and real estate subsidiaries
-15-
<PAGE> 17
and senior notes of the parent company. Needed funds initially have been
borrowed under the bank credit agreements, and the credit availability under
these facilities periodically has been restored by paying down outstanding
borrowings using proceeds from public offerings of parent company senior notes
or Class B common stock.
The Company's business plan includes the use of energy and real estate
partnerships and sales in the normal course of business of mature real estate
properties to provide for some of its funding needs. The Company believes that
these resources, together with operating cash flows, proceeds from the North
Texas gas contract buyout and sales of non-core assets, will be sufficient to
allow it to provide for its short- and long-term liquidity needs. Incremental
short-term needs, if any, can be met by borrowing under existing committed bank
credit facilities while public debt and equity markets can be accessed to
provide for longer-term needs.
In concert with its longstanding strategy of using partnerships and
selling mature real estate properties to fund capital requirements, the Company
sold a 75% interest in 10 office buildings in The Woodlands to Crescent Real
Estate Equities, Inc., in July 1995. This transaction, which reduced the
Company's long-term debt by $39 million, established a relationship that is
expected to provide funding for future office development projects in The
Woodlands.
At July 31, 1995, the Company's long-term debt totaled $787 million, down
from $895 million at the beginning of the fiscal year. The Company's committed
bank revolving credit and commercial paper facilities now provide for an
aggregate borrowing capacity of approximately $558 million, of which
approximately $494 million was unused at July 31, 1995. Exclusive of
maturities under its bank credit facilities and commercial paper program, the
Company's five-year debt maturities totaled approximately $232 million at that
date. Because the Company's borrowing capabilities now exceed any anticipated
future needs, a review is in progress that could result in reductions of the
size of its bank revolving credit and commercial paper facilities.
The Company's fiscal 1996 budget for capital and exploratory expenditures
initially was set at $228.7 million, 4.1% above fiscal 1995's actual spending.
In August, this amount was increased to $255 million to cover incremental
Exploration and Production spending for the expected third quarter producing
property acquisition and expenditures in North Texas to take advantage of the
opportunity to increase production levels after the gas contract buyout.
During the first half of fiscal 1996, capital and exploratory expenditures
totaled $98.9 million. That period's spending was below budget largely because
of timing differences that should reverse as the year progresses.
Because of future collections of proceeds from the natural gas contract
buyout and from asset sales associated with the ongoing refocusing program, the
Company's long-term debt is expected to remain below the level that existed at
the beginning of fiscal 1996. However, because of the timing of cash receipts
from Natural and from asset sales, long-term debt balances may rise or fall
significantly during individual quarters. After decreasing by $93.2 million
during the second quarter, long-term debt likely will rise during fiscal 1996's
third quarter when capital expenditures are expected to be high and the
Company's quarterly Federal income tax deposit will include a substantial
amount related to the gas contract buyout. Additionally, as discussed below,
the Company's energy operating earnings and cash flows will likely be depressed
during the third quarter before recovering in the fourth.
SECOND-HALF OPERATIONS. The Company's operations during fiscal 1996's second
half are expected to be affected by several factors which will adversely impact
the third quarter results, but most of which should reverse during the fourth.
These include (i) a temporary shutdown of Natural's pipeline system that
transports natural gas from the Company's Bridgeport gas processing plant, (ii)
a one-month shutdown of the MTBE plant in which the Company holds a one-third
interest and (iii) a build-up of NGL inventories during the third quarter to
meet fourth quarter demand.
Natural's pipeline is scheduled to be out of operation for 20 days in
early October. During this period, the Company plans to shut down its
Bridgeport plant for 10 days for maintenance. Subsequent to the recent
termination of the Natural contract, the Company--while continuing to use
Natural's pipeline to transport its North Texas residue gas--has begun taking
the steps necessary to access alternative
-16-
<PAGE> 18
interstate and intrastate pipelines to transport that gas. Unless alternative
outlets are secured by early October, the Company's Bridgeport plant will be
idled and its North Texas gas production will be curtailed during the entire
20-day period that Natural's pipeline is out of service.
The MTBE plant was shut down on August 13 for approximately one month to
implement some plant modifications and to replace certain defective or
improperly designed equipment (largely at the cost of the respective
suppliers). After it is restarted in mid-September, the plant is expected to
be capable of producing up to 15,000 barrels per day, which compares to its
original design capacity of 12,600 barrels per day.
Market-sensitive natural gas prices have been extremely low recently (the
Company's average sales price for such production was $1.47 per Mcf in August).
This, coupled with price-related production curtailments and the factors
discussed above, will depress energy operating earnings in the third quarter.
Results could rebound in the fourth quarter, however, because of seasonal
improvements in energy markets, sales of the NGLs inventoried in the third
quarter and increased production of the MTBE plant.
OPERATING STATISTICS
Certain operating statistics (including, where applicable, proportional
interests in equity partnerships) for the three- and six-month periods ended
July 31, 1995 and 1994 follow:
<TABLE>
<CAPTION>
Three Months Six Months
---------------------- ----------------------
1995 1994 1995 1994
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
AVERAGE DAILY VOLUMES
Natural gas sales (Mcf) . . . . . . . . . . 207,700 211,200 216,100 214,900
Crude oil and condensate sales (Bbls) . . . 5,400 6,500 5,500 6,600
Natural gas liquids produced (Bbls) . . . . 48,900 49,200 48,600 46,300
Pipeline throughput (Mcf)
Total . . . . . . . . . . . . . . . . . 368,000 457,000 364,000 483,000
Exclusive of Winnie Pipeline
(which was sold in June 1994) . . . . 368,000 391,000 364,000 358,000
AVERAGE SALES PRICES
Natural gas (per Mcf) . . . . . . . . . . . $ 2.31 $ 2.75 $ 2.41 $ 2.78
Crude oil and condensate (per Bbl). . . . . 16.85 17.16 17.10 15.25
Natural gas liquids produced (per Bbl). . . 11.39 11.26 11.45 11.14
RESIDENTIAL LOT SALES - THE WOODLANDS
Lots sold . . . . . . . . . . . . . . . . . 277 260 462 488
Average price . . . . . . . . . . . . . . . $ 40,217 $ 36,462 $ 39,663 $ 37,158
Average price per square foot . . . . . . . 3.88 3.45 3.83 3.47
</TABLE>
RESULTS OF OPERATIONS - SIX MONTHS ENDED JULY 31, 1995
COMPARED WITH SIX MONTHS ENDED JULY 31, 1994
The Company's results for the six-month periods ended July 31, 1995 and
1994--both before and after unusual items--are summarized in the table on the
following page. Because of the impact of unusual items, the Company's net
earnings for the first half of fiscal 1996 of $70.1 million were $48.3 million
above those of the prior-year period. Unusual items increased the net earnings
of the current-year period by $44.1 million versus $4.3 million during the
comparable prior-year period.
-17-
<PAGE> 19
Excluding the unusual items, fiscal 1996's first half earnings were $8.5
million above those of the comparable prior-year period. The major
contributors to this increase included improved gas processing margins and
earnings from real estate operations, the Company's equity in the earnings of
the MTBE plant partnership and personnel-reduction- driven declines in costs
and expenses. These improvements were partially offset, however, by the
negative impact of lower market-sensitive natural gas prices in fiscal 1996 and
the one-month impact on subsequent operations of the buyout of the Natural gas
sales contract.
The following table and discussion identify and explain the major
increases (decreases) in earnings for the six- month periods (in millions):
<TABLE>
<CAPTION>
Segment Operating Earnings
-------------------------------
Exploration
and Gas Real Pretax Net
Production Services Estate Other* Earnings Earnings
---------- -------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
FISCAL 1995 AMOUNTS . . . . . . . . . . . $ 48.1 $ 13.9 $ 15.3 $(44.2) $ 33.1 $ 21.8
------ ------ ------ ------ ------ ------
ELIMINATE IMPACT OF FISCAL 1995
UNUSUAL ITEMS (see page 13)
Gas Services restructuring charges
and asset write-downs . . . . . . . . . - 25.7 - - 25.7 16.7
Gains from major energy asset sales . . . (3.8) (29.8) - - (33.6) (21.0)
------ ------ ------ ------ ------ ------
(3.8) (4.1) - - (7.9) (4.3)
------ ------ ------ ------ ------ ------
FISCAL 1995 AMOUNTS BEFORE UNUSUAL ITEMS 44.3 9.8 15.3 (44.2) 25.2 17.5
------ ------ ------ ------ ------ ------
MAJOR INCREASES (DECREASES)
Natural gas production
Lower market-sensitive sales price . . . (8.7) - - (8.7) (5.7)
Contract buyout . . . . . . . . . . . . (3.8) - .5 (3.3) (2.1)
Lower salary and benefits expenses
due to personnel reductions . . . . . . 2.3 1.9 .3 1.4 5.9 3.8
Absence of proved property impairments . . 3.3 - - - 3.3 2.1
Increased exploratory dry hole costs . . . (2.2) - - (2.2) (1.4)
Reduced amortization of deferred gas
contract restructuring proceeds . . . . (1.9) - - (1.9) (1.2)
Natural gas processing
Higher NGL prices . . . . . . . . . . . - 2.3 - - 2.3 1.5
Increased production volumes . . . . . . - .9 - - .9 .6
Lower feedstock costs due to
lower market-sensitive gas prices. . . - 5.4 - - 5.4 3.5
Deferred profits on NGL inventories. . . - 1.9 - - 1.9 1.2
Natural gas buy/resale gross profits . . .
UPRC partnerships . . . . . . . . . . . - 2.2 - - 2.2 1.4
Southwestern's North Texas system . . . - (1.4) - (1.4) (.9)
Equity in MTBE plant earnings . . . . . . - 3.9 - - 3.9 2.5
Real Estate--The Woodlands . . . . . . . - - 1.3 - 1.3 .8
Interest expense incurred . . . . . . . . - - - 2.7 2.7 1.8
Other
SAR/Bonus unit expense accruals . . . . (.3) (.2) (.3) (.5) (1.3) (.8)
Miscellaneous . . . . . . . . . . . . . 2.0 (1.6) (.5) .7 .6 .4
Lower effective tax rate . . . . . . . . . - - - - - 1.0
------ ------ ------ ------ ------ ------
(9.3) 15.3 .8 4.8 11.6 8.5
------ ------ ------ ------ ------ ------
FISCAL 1996 AMOUNTS BEFORE UNUSUAL ITEMS . 35.0 25.1 16.1 (39.4) 36.8 26.0
------ ------ ------ ------ ------ ------
FISCAL 1996 UNUSUAL ITEMS (see pages
12 and 13)
Gain from natural gas contract buyout . . 205.3 - - - 205.3 127.2
Write-downs of real estate properties . . - - (112.8) - (112.8) (73.3)
Personnel reduction program costs . . . . (7.9) (3.6) (3.0) (5.7) (20.2) (12.5)
Gain from sale of producing properties . . 4.3 - - - 4.3 2.7
------ ------ ------ ------ ------ ------
201.7 (3.6) (115.8) (5.7) 76.6 44.1
------ ------ ------ ------ ------ ------
FISCAL 1996 AMOUNTS AFTER UNUSUAL ITEMS . $236.7 $ 21.5 $ (99.7) $(45.1) $ 113.4 $ 70.1
====== ====== ======= ====== ======= =======
</TABLE>
___________________________________
*Includes general and administrative expense and other expense.
-18-
<PAGE> 20
EXPLORATION AND PRODUCTION OVERVIEW
Exploration and Production operating earnings before unusual items declined
$9.3 million during fiscal 1996's first half, to $35 million. This unfavorable
comparison was primarily the result of lower market-sensitive natural gas
prices and the adverse impact on subsequent operations of the natural gas
contract buyout effective July 1, 1995. The negative effect of these items was
offset somewhat by lower salary and benefits expenses resulting from the first
quarter personnel reduction program and the absence of proved property
impairments in the fiscal 1996 period.
NATURAL GAS - LOWER MARKET-SENSITIVE SALES PRICE ($8.7 MILLION DECREASE). For
production outside the North Texas area, the Company's average market-sensitive
natural gas sales price during the first six months of fiscal 1996 of $1.57 per
Mcf was 24% below the $2.07 realized during the comparable period of the prior
year. Prices were strong in the prior year's first quarter before declining
over the remainder of the fiscal year (the full-year average market-sensitive
sales price for fiscal 1995 was $1.90 per Mcf).
NATURAL GAS - CONTRACT BUYOUT. Effective with the contract buyout on July 1,
1995, the Company began receiving market-sensitive prices for approximately 80
MMcf per day of North Texas residue gas previously sold at substantially higher
contract prices ($4.00 and $3.75 per Mcf, respectively, in calendar 1995 and
1994). Because of seasonal and other market factors, North Texas production
was sold for $1.25 per Mcf in July 1995, causing gas sales revenues to be
substantially less than they had been in July 1994. After price-related cost
reductions, oil and gas operating earnings on a year-to-year basis were lowered
by $3.8 million. After interest income accrued on the Company's share of the
receivables from Natural and income taxes, the net earnings impact was $2.1
million.
ABSENCE OF PROVED PROPERTY IMPAIRMENTS ($3.3 MILLION INCREASE). Downward
revisions in reserve estimates for certain oil and gas properties resulted in
the recording of impairments totaling $3.3 million during the prior year's
second quarter. No such impairments have occurred in fiscal 1996.
INCREASED EXPLORATORY DRY HOLE COSTS ($2.2 MILLION DECREASE). Exploratory dry
hole costs totaled $2.2 million during fiscal 1996's first six months;
virtually no such costs were expensed in the comparable prior-year period.
REDUCED AMORTIZATION OF DEFERRED GAS CONTRACT RESTRUCTURING PROCEEDS ($1.9
MILLION DECREASE). Prior to the buyout of the Natural contract effective July
1, 1995, certain volume-related deferred contract restructuring proceeds were
amortized. Although not increasing cash flows, such amortization--net of
related costs--added $6.3 million to operating earnings in fiscal 1995's first
half. Exclusive of the $29.1 million separately recognized in connection with
the natural gas contract buyout, such amortization added $4.4 million, or $1.9
million less, to the operating earnings of fiscal 1996's first half.
GAS SERVICES OVERVIEW
Gas Services operating earnings before unusual items rose $15.3 million during
fiscal 1996's first half largely because of lower natural gas feedstock costs,
higher NGL sales prices and increased earnings from the Company's one-third
interest in an MTBE plant partnership. Lower feedstock costs because of the
period's depressed market-sensitive natural gas prices, coupled with higher NGL
prices, caused natural gas processing margins to be substantially better during
the first six months of fiscal 1996. NGL production volumes averaged 48,600
barrels per day, up from 46,300 during the first half of fiscal 1995. Natural
gas buy/resale gross profits also rose during the period largely because of the
lower market-sensitive natural gas prices, which caused margins under
fixed-price sales contracts to increase. Also contributing to the improvement
were personnel-reduction-related cost savings.
NATURAL GAS PROCESSING - HIGHER NGL PRICES ($2.3 MILLION INCREASE). The
average price for NGLs produced during the current period of $11.45 per barrel
was $.31 above the average for the comparable prior-year period, increasing
operating earnings by $2.3 million.
-19-
<PAGE> 21
NATURAL GAS PROCESSING - INCREASED PRODUCTION VOLUMES ($.9 MILLION INCREASE).
NGL production volumes averaged 48,600 barrels per day in fiscal 1996's first
half, up 5% from the prior-year period's 46,300. Certain "keep whole" plants
were temporarily idled early in fiscal 1995 when they were uneconomical to
operate because market-sensitive natural gas feedstock costs were high at the
same time NGL prices were depressed. These plants operated in fiscal 1996 and
this--coupled with an expansion of the Madison plant, which was completed in
January 1995, and increased gas production of the Ferguson-Burleson
system--caused current-period volumes to increase.
NATURAL GAS PROCESSING - LOWER FEEDSTOCK COSTS DUE TO LOWER MARKET-SENSITIVE
GAS PRICES ($5.4 MILLION INCREASE). Feedstock costs consist primarily of
amounts paid to the natural gas producers. Such amounts are based either on
the value of natural gas consumed in processing under keep-whole agreements or
on a percentage of the value of NGLs produced under percent-of-proceeds
agreements. Accordingly, feedstock costs under keep-whole agreements vary
directly with market-sensitive natural gas prices, while costs under
percentage-of-proceeds agreements vary directly with NGL prices. Consequently,
lower market-sensitive gas prices during fiscal 1996's first half caused
feedstock costs under keep-whole agreements to decline, increasing operating
earnings by $5.4 million.
DEFERRED PROFITS ON NGL INVENTORIES ($1.9 MILLION INCREASE). Since for plant
settlement purposes all plant production is presumed to be sold, the earnings
applicable to production inventoried by the marketing department must be
eliminated for accounting purposes. This elimination typically decreases
earnings (defers profit) when NGL inventory volumes increase and vice versa
when volumes decrease. In the current period, the Company's NGL inventories
were reduced by 1.2 million barrels as essentially all the remaining volumes of
unfractionated liquids associated with the April 1994 fire at Gulf Coast
Fractionators' (GCF) facility were fractionated and sold. As a result, $.6
million of previously deferred profits were recognized. Conversely,
inventories increased by 2.4 million barrels in the prior-year period, largely
due to the fire-related shutdown of GCF, resulting in the deferral of $1.3
million in profits.
NATURAL GAS BUY/RESALE GROSS PROFITS - UPRC PARTNERSHIPS ($2.2 MILLION
INCREASE). The Company's equity in the buy/resale gross profits of this
45%-owned venture with Union Pacific Resources Company (UPRC) were $2.2 million
higher during the first half of fiscal 1996. The increase was principally
related to fixed-price sales contracts and occurred largely because gas
purchase costs declined as a result of the period's lower market-sensitive gas
prices. Also, the Company purchased smaller volumes under fixed-price
contracts in fiscal 1996 and at somewhat lower prices.
NATURAL GAS BUY/RESALE GROSS PROFITS - SOUTHWESTERN'S NORTH TEXAS SYSTEM ($1.4
MILLION DECREASE). Gross profits from the buy/resale activities of this system
during the first half of fiscal 1996 were $1.4 million below those of the
comparable prior-year period largely because of increased purchases of gas at
fixed prices. To secure NGL processing feedstock volumes during times of
limited drilling in its service area, this system in recent years has entered
into one- and two-year gas supply contracts. Because of fiscal 1996's lower
market-sensitive gas prices, the system's revenues from residue gas sales
declined. This, coupled with the absence of a corresponding decline in gas
purchase costs (because of the fixed-price agreements), caused margins to be
narrowed.
EQUITY IN MTBE PLANT EARNINGS ($3.9 MILLION INCREASE). During the first half
of fiscal 1996, the Company recorded $3.9 million as its one-third share of the
pretax earnings of Belvieu Environmental Fuels, which owns and operates an MTBE
plant. The plant, which began producing in the summer of 1994, suffered a
series of start-up problems which extended into the first quarter of the
current year. After resuming operations in March, the plant was deemed to be
in service effective April 1, 1995. During the Company's second quarter, the
plant produced approximately 12,000 barrels per day of MTBE. After a one-month
shutdown in the third quarter to make certain modifications and to replace some
defective equipment, the plant is expected to be capable of producing up to
15,000 barrels per day.
-20-
<PAGE> 22
REAL ESTATE AND OTHER
THE WOODLANDS ($1.3 MILLION INCREASE). Excluding unusual items, operating
earnings from real estate activities in The Woodlands totaled $16 million, or
$1.3 million more than was earned during the first six months of fiscal 1995.
The increase was the result of a $2.4 million rise in earnings from commercial
properties, which was attributable to several factors, including: (i) receipt
of a $.6 million construction management fee, (ii) higher rental rates and
occupancies, (iii) improved earnings for The Woodlands Executive Conference
Center, (iv) higher earnings of a mortgage subsidiary and (v) earnings from The
Woodlands Mall, which opened in October 1994.
Earnings from residential lot sales were essentially flat as a 5%
decline in the number of lots sold (462 in the current period, compared with
488 in the corresponding prior-year period) was offset by a 7% increase in the
average sales price. In response to declining mortgage interest rates, second
quarter lot sales were almost 7% above the prior period's level; conversely,
largely because of higher interest rates, first quarter lot sales trailed those
of the prior-year period by 19%. Operating earnings from commercial land sales
also were essentially even as profits from fiscal 1996 sales, including 14.1
acres in the Town Center, matched gains recognized in the prior period on sales
to partnerships of sites for the Cochran's Crossing retail center and the
Forest View Apartments.
INTEREST EXPENSE INCURRED. Interest expense incurred during fiscal 1996's
first half (of $32.7 million) was $2.7 million below that of the prior-year
period because of a $109 million decline in the average balance of outstanding
debt. This decline occurred principally because cash proceeds from current and
prior-year asset sales and the gas contract buyout were used to pay down debt.
The interest savings from the debt balance decline were partially offset,
however, by the impact of higher short-term (variable) interest rates during
fiscal 1996's first quarter.
OTHER - SAR/BONUS UNIT EXPENSE ACCRUALS ($1.3 MILLION DECREASE). During the
fiscal 1996 period, $.3 million in SAR/Bonus unit expense accruals were
recorded as the average price of the Company's stock rose $.50 per share.
Conversely, in the comparable prior-year period, SAR/Bonus expense accrual
reversals of $1 million were recorded because of declines in the stock price.
-21-
<PAGE> 23
RESULTS OF OPERATIONS - THREE MONTHS ENDED JULY 31, 1995
COMPARED WITH THREE MONTHS ENDED JULY 31, 1994
The Company's results for the three-month periods ended July 31, 1995
and 1994--both before and after unusual items--are summarized in the table that
follows. Because of the impact of unusual items, the Company's net earnings
for the second quarter of fiscal 1996 of $73.3 million were $61.9 million above
those of the prior year's second quarter. Unusual items increased net earnings
of the current-year period by $56.6 million, or $54.8 million more than during
the prior-year period.
Excluding the unusual items, fiscal 1996's second quarter earnings were
$7.1 million above those of the prior-year period largely because of increases
in segment operating earnings for Gas Services and Real Estate activities and
reductions in general and administrative expense and other expense.
The following table and discussion identify and explain the major
increases (decreases) in earnings for the three-month periods (in millions):
<TABLE>
<CAPTION>
Segment Operating Earnings
-------------------------------
Exploration
and Gas Real Pretax Net
Production Services Estate Other* Earnings Earnings
---------- -------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
FISCAL 1995 AMOUNTS . . . . . . . . . . $ 19.5 $ 11.7 $ 8.3 $(22.3) $ 17.2 $ 11.4
------ ------ ------ ------ ------ ------
ELIMINATE IMPACT OF FISCAL 1995
UNUSUAL ITEMS (see page 13)
Gas Services restructuring charges
and asset write-downs . . . . . . . . - 25.7 - - 25.7 16.7
Gain on sale of Winnie/Spindletop . . . - (29.8) - - (29.8) (18.5)
------ ------ ------ ------ ------ ------
- (4.1) - - (4.1) (1.8)
------ ------ ------ ------ ------ ------
FISCAL 1995 AMOUNTS BEFORE UNUSUAL ITEMS 19.5 7.6 8.3 (22.3) 13.1 9.6
------ ------ ------ ------ ------ ------
MAJOR INCREASES (DECREASES)
Natural gas production
Lower market-sensitive sales price. . (2.9) - - - (2.9) (1.9)
Contract buyout (see page 19) . . . . (3.8) - - .5 (3.3) (2.1)
Lower salary and benefits expenses
due to personnel reductions . . . . 1.8 .9 .3 1.4 4.4 2.9
Reduced amortization of deferred gas
contract restructuring proceeds . . . (1.4) - - - (1.4) (.9)
Proved property impairments
see page 19) . . . . . . . . . . . . 3.3 - - - 3.3 2.1
Natural gas processing - Lower
feedstock costs due to lower
market-sensitive gas prices . . . . . - 2.1 - - 2.1 1.4
Equity in MTBE plant earnings . . . . . - 3.0 - - 3.0 2.0
Real Estate--The Woodlands . . . . . . - - 1.0 - 1.0 .7
Lower interest expense incurred
due to average balance decline. . . . - - - .8 .8 .5
Other . . . . . . . . . . . . . . . . 1.1 (1.5) .5 1.2 1.3 .8
Lower effective tax rate . . . . . . . - - - - - 1.6
------ ------ ------ ------ ------ ------
(1.9) 4.5 1.8 3.9 8.3 7.1
------ ------ ------ ------ ------ ------
FISCAL 1996 AMOUNTS BEFORE UNUSUAL ITEMS 17.6 12.1 10.1 (18.4) 21.4 16.7
------ ------ ------ ------ ------ ------
FISCAL 1996 UNUSUAL ITEMS (see
see pages 12 and 13)
gain from natural gas contract buyout . 205.3 - - - 205.3 127.2
Write-downs of real estate properties . - - (112.8) - (112.8) (73.3)
Gain from sale of producing
properties . . . . . . . . . . . . . 4.3 - - - 4.3 2.7
------ ------ ------ ------ ------ ------
209.6 - (112.8) - 96.8 56.6
------ ------ ------ ------ ------ ------
FISCAL 1996 AMOUNTS AFTER UNUSUAL ITEMS $227.2 $ 12.1 $(102.7) $(18.4) $ 118.2 $ 73.3
====== ====== ======= ====== ======= =======
</TABLE>
___________________________________
*Includes general and administrative expense and other expense.
-22-
<PAGE> 24
EXPLORATION AND PRODUCTION OVERVIEW
Exclusive of unusual items, Exploration and Production Division fiscal 1996
second quarter operating earnings were $1.9 million below those of the
comparable prior-year period principally due to lower market-sensitive natural
gas prices, the previously discussed impact of the natural gas contract buyout
on operations and reduced amortization of deferred gas contract restructuring
proceeds. These unfavorable variances were substantially offset by the absence
of proved property impairments, which reduced the prior-period's earnings by
$3.3 million, and personnel-reduction-related decreases in operating costs and
expenses. During fiscal 1996's second quarter, natural gas sales averaged
207,700 Mcf per day at $2.31 per Mcf versus the prior period's 211,200 at
$2.75. The volume decline resulted from price-related production curtailments.
NATURAL GAS - LOWER MARKET-SENSITIVE SALE PRICE ($2.9 MILLION DECREASE). The
Company's average market-sensitive natural gas sales price during the current
quarter was $1.64 per Mcf, down from the corresponding prior-year period's
$1.96, reducing operating earnings by $2.9 million.
REDUCED AMORTIZATION OF DEFERRED GAS CONTRACT RESTRUCTURING PROCEEDS ($1.4
MILLION DECREASE). As discussed on page 19, this amortization declined in
fiscal 1996 and ceased with the buyout of the Natural contract. Such
amortization added $1.8 million to the operating earnings of the second quarter
of fiscal 1996, $1.4 million less than the amount for the comparable prior-year
period.
GAS SERVICES
Exclusive of unusual items, Gas Services operating earnings before unusual
items increased by $4.5 million (from $7.6 million to $12.7 million) during the
fiscal 1996 period. This improvement was largely due to the Company's $3
million equity in the pretax earnings of the MTBE plant, which began producing
on a test basis during the prior-year period. Also contributing to the rise
were improved NGL margins, which were boosted by a $2.1 million decline in
feedstock costs caused by the period's lower market-sensitive natural gas
prices.
REAL ESTATE
THE WOODLANDS ($1 MILLION INCREASE). Operating earnings from real estate
activities in The Woodlands increased $1 million during fiscal 1996's second
quarter. The current period's earnings benefitted from increased residential
lot sales in The Woodlands (277, versus 260 during last year's second quarter)
and higher lot sales prices. Also contributing to the favorable
quarter-to-quarter variance were earnings from the Company's 50% interest in
The Woodlands Mall, which opened in October 1994.
-23-
<PAGE> 25
Part II - Other Information
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Mitchell Energy & Development
Corp. was held on June 28, 1995 for the purpose of electing a Board of 12
directors and considering and acting upon a proposal regarding the appointment
of independent public accountants. Proxies for the meeting were solicited
pursuant to Section 14A of the Securities Exchange Act of 1934, and there was
no solicitation in opposition to the Company's solicitations. Each of the
nominees for the Board of Directors was elected by the Class A common
stockholders.
Stockholders of the Company approved a proposal to appoint Arthur
Andersen LLP, independent public accountants, to examine the accounts of the
Company for the fiscal year ending January 31, 1996. The vote was as follows:
<TABLE>
<CAPTION>
Per-
Number cent
---------- ------
<S> <C> <C>
Shares voted "for" . . . . . . . . . . . . 21,856,825 99.76
Shares voted "against" . . . . . . . . . . 16,257 .07
Shares abstaining . . . . . . . . . . . . 36,493 .17
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10(a)* Settlement Agreement dated July 1, 1995 between Mitchell
Energy Corporation, Mitchell Gas Services, Inc. and
Natural Gas Pipeline Company of America.
10(b)* Agreement to Terminate Gas Purchase Contract and
Associated Agreements dated July 1, 1995 between Natural
Gas Pipeline Company of America and Mitchell Energy
Corporation.
12 Computation of ratio of earnings to fixed charges
* This exhibit, which was filed with the original Form 10-Q for the
quarter ended July 31, 1995, is not being refiled with this Form
10-Q/A.
(b) No reports were filed on Form 8-K during the three-month period
ended July 31, 1995.
-24-
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MITCHELL ENERGY & DEVELOPMENT CORP.
(Registrant)
Dated: January 15, 1996 By: /s/ Philip S. Smith
--------------------------------------
Philip S. Smith
Senior Vice President - Administration
and Chief Financial Officer
-25-
<PAGE> 27
EXHIBIT INDEX
12 Computation of ratio of earnings to fixed charges
27 Financial Data Schedule
<PAGE> 1
Exhibit 12
Mitchell Energy & Development Corp.
Computation of Ratio of Earnings to Fixed Charges
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Six
Months
Fiscal Year Ended January 31 Ended
----------------------------------------------------- July 31,
1991 1992 1993 1994 1995 1995
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Pretax earnings . . . . . . . . . . . . . . $ 60,484 $ 73,188 $ 60,022 $ 47,376 $ 70,551 $113,375
Add (Deduct):
Previously capitalized interest
charged against pretax earnings. . . . 8,776 14,887 9,545 11,552 22,158 55,629(e)
Losses of less-than-50%-owned persons . 23 26 99 32 1,104 3
Fixed charges (see below) . . . . . . . 98,633 90,107 85,169 84,788 85,988 40,436
Reverse effect of inclusion of interest
capitalized in fixed charges . . . . . (44,253) (37,460) (34,161) (33,956) (33,011) (13,945)
Undistributed earnings of
less-than-50%-owned persons . . . . . (11,690) (10,521) (10,305) (3,594) (914) (1,688)
-------- -------- -------- -------- -------- --------
$111,973 $130,227 $110,369 $106,198 $145,876 $193,810
======== ======== ======== ======== ======== ========
FIXED CHARGES
Interest expense incurred
Consolidated (a) (c) . . . . . . . . . . $ 92,874 $ 84,025 $ 77,451 $ 75,252 $ 71,570 $ 33,566
50%-owned persons . . . . . . . . . . . 3,670 3,284 4,609 6,236 7,912 5,270
Less-than-50%-owned persons . . . . . . - - - - 3,032 (b) -
-------- -------- -------- -------- -------- --------
96,544 87,309 82,060 81,488 82,514 38,836
Portion of rental expense
representing interest (d). . . . . . . . 2,089 2,798 3,109 3,300 3,474 1,600
-------- -------- -------- -------- -------- --------
$ 98,633 $ 90,107 $ 85,169 $ 84,788 $ 85,988 $ 40,436
======== ======== ======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES . . . . 1.14 1.45 1.30 1.25 1.70 4.79
======== ======== ======== ======== ======== ========
</TABLE>
_____________________________________
(a) Consists of interest expense as reported in consolidated statements of
earnings and interest expense related to finance operations which is
reported as costs and expenses in the consolidated statements of earnings.
(b) Related to the Company's guaranty covering $58,667 of indebtedness of
Belvieu Environmental Fuels (BEF), a 33.33%- owned entity, under which it
could have been required to perform prior to the conversion of this
indebtedness to a five-year term loan in August 1995.
(c) At July 31, 1995, the Company had outstanding guaranties of approximately
$81,800 of indebtedness of less-than-50%-owned partnerships and
approximately $4,400 of indebtedness of unaffiliated, nonprofit
institutions under which it has not been, nor is it expected that it will
be, required to perform. Fixed charges related to these outstanding
borrowings, estimated at approximately $3,300 for the six-month period
ended July 31, 1995, have been excluded from the reported fixed charges.
(d) Represents one-third of rental expense under operating lease agreements.
(e) Second quarter real estate property write-downs included $48,707 of
previously capitalized interest.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES OF MITCHELL ENERGY &
DEVELOPMENT CORP. AND SUBSIDIARIES AT JULY 31, 1995 AND FOR THE SIX MONTH PERIOD
THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-START> JAN-31-1995
<PERIOD-END> JUL-31-1995
<CASH> 13,114
<SECURITIES> 0
<RECEIVABLES> 206,989
<ALLOWANCES> 2,379
<INVENTORY> 16,423
<CURRENT-ASSETS> 240,467
<PP&E> 2,137,868
<DEPRECIATION> 1,394,758
<TOTAL-ASSETS> 1,867,210
<CURRENT-LIABILITIES> 205,834
<BONDS> 786,723
<COMMON> 5,386
0
0
<OTHER-SE> 522,501
<TOTAL-LIABILITY-AND-EQUITY> 1,867,210
<SALES> 632,850
<TOTAL-REVENUES> 632,850
<CGS> 474,408
<TOTAL-COSTS> 474,408
<OTHER-EXPENSES> 26,342
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,725
<INCOME-PRETAX> 113,375
<INCOME-TAX> 43,309
<INCOME-CONTINUING> 70,066
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70,066
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.35
</TABLE>
